A Dialogue on the Costs and Benefits of Automatic Stays for Derivatives and Repurchase Agreements

26 Pages Posted: 9 Jan 2012 Last revised: 18 Oct 2012

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

David A. Skeel Jr.

University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)

Date Written: March 1, 2012

Abstract

For nearly two years, the two of us have had a running discussion of the costs and benefits of automatic stays in bankruptcy for qualified financial contracts (QFCs) such as derivatives and repurchase agreements, particularly those held by systemically important major dealer banks. Under current U.S. bankruptcy law, these contracts are exempted from the automatic stay. The advantages and disadvantages of this treatment have been a matter of significant debate for the past decade, particularly since the 2008 crisis.

After some background on QFCs and automatic stays, we provide our joint analysis of the costs and benefits of stays on the QFCs, with a focus on systemically important financial institutions, including the special case of central market utilities. Following this, we state our respective policy conclusions. Briefly speaking, we both believe that repos (and certain closely related QFCs) that are backed by liquid securities should be exempt from automatic stays, or receive an effectively similar treatment. Repos backed by illiquid assets, on the other hand, should not be given this safe harbor. We both believe that derivatives that have not been centrally cleared should be subject to automatic stays. One of us believes that stays should also apply to cleared derivatives. The other author favors an exemption of cleared derivatives from stays, except in the case of a failure of a regulated central clearing party.

Keywords: qualified financial contract, OTC derivative, swap, repurchase agreement, automatic stay, clearinghouse, Dodd-Frank Act, financial regulation, finance, bankruptcy

JEL Classification: G20, G21, G30, G32, G33, K22, K23

Suggested Citation

Duffie, Darrell and Skeel, David A., A Dialogue on the Costs and Benefits of Automatic Stays for Derivatives and Repurchase Agreements (March 1, 2012). U of Penn, Inst for Law & Econ Research Paper No. 12-02; Rock Center for Corporate Governance at Stanford University Working Paper No. 108; Stanford University Working Paper No. 108. Available at SSRN: https://ssrn.com/abstract=1982095 or http://dx.doi.org/10.2139/ssrn.1982095

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

655 Knight Way
Knight Management Center
Stanford, CA 94305-7298
United States
650-723-1976 (Phone)
650-725-8916 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David A. Skeel Jr. (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-573-9859 (Phone)
215-573-2025 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Paper statistics

Downloads
873
Rank
20,635
Abstract Views
5,702